No Estate and Gift Tax Clawback After Year 2025

The Tax Cuts and Jobs Act (TCJA) of 2017 temporarily increased the basic exclusion amount (BEA) to $10 million, indexed for inflation after 2011, for gifts made or estates of decedents dying after December 31, 2017 and before January 1, 2026.  After 2025, BEA will revert back to $5 million, indexed for inflation after 2011.  On November 22, 2019, the IRS issued final regulations confirming that taxpayers who die after 2025 will not lose the tax benefit of the higher exclusion amount applied to gifts made between 2018 and 2025.  The final regulations provide a special rule that allows an estate to compute its estate tax credit using the higher of the BEA applicable to gifts made during life or the BEA applicable on the date of death.  For example, an unmarried individual made taxable gifts of $8 million in 2018 and dies after 2025 when the BEA drops back to $5 million adjusted for inflation.  Under the special rule, the BEA for the estate of the decedent will be $8 million.

The final regulations also clarify that the sunset of the increased BEA has no impact on the existing deceased spouse’s unused exemption (DSUE) rules.  For example, if spouse H dies in 2019 and the executor makes the portability election to allow the surviving spouse W to take into account H’s $11.4 million DSUE amount.  W makes no taxable gifts, does not remarry, and dies after 2025.  W’s applicable exclusion amount (AEA) includes the full amount of H’s $11.4 million DSUE and W’s BEA applicable at W’s death.

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